USD/CAD steadily moves back above 1.3500 amid sliding oil prices, modest USD strength

• USD/CAD catches fresh bids on Friday and is supported by a combination of factors.
• Weaker crude oil prices undermine the loonie and act as a tailwind amid a bullish USD.
• Traders eye Canadian Retail Sales, US PMIs for some impetus ahead of Fed’s Powell.

The USD/CAD pair attracts fresh buying on the last day of the week and steadily climbs back above the 1.3500 psychological mark during the early European session. Spot prices, however, remain below the highest level since July 2020 touched on Thursday.

Despite worries about a tight global supply, a deteriorating fuel demand outlook continues to weigh on crude oil prices and undermines the commodity-linked loonie. Apart from this, the strong bullish sentiment surrounding the US dollar, bolstered by hawkish Fed expectations, acts as a tailwind for the USD/CAD pair.

It is worth recalling that the US central bank had signalled on Wednesday that it will likely undertake more aggressive rate increases to cap inflation. This remains supportive of the ongoing move up in the US Treasury bond yields, which along with the prevalent risk-off environment, is benefitting the safe-haven greenback.

The market sentiment remains fragile amid worries that rapidly rising borrowing costs will lead to a deeper global economic downturn. Furthermore, concerns that China's zero-covid policy will dent fuel demand exert pressure on oil prices. That said, geopolitical risks seem to lend some support to the black liquid.

Nevertheless, the fundamental backdrop suggests that the path of least resistance for the USD/CAD pair is to the upside. Even from a technical perspective, this week's breakout through a resistance marked by the top end of a multi-month-old ascending channel supports prospects for an extension of the near-term appreciating move.

Market participants now look forward to the release of the Canadian monthly Retail Sales data, which, along with the flash US PMI prints, might provide some impetus to the USD/CAD pair. Traders will further take cues from Fed Chair Jerome Powell's speech, which will drive the USD demand and produce short-term opportunities.

Technical levels to watch